Moneyball without the ball

Vanadium battery demand and ways to invest in its potential

In past portfolio updates I briefly mentioned my position in Largo Resources and how I have a positive outlook on the vanadium market. I wanted to expand on those thoughts in this post.

Vanadium Supply and Demand

The Vanadium market has been in deficit for over five years. I don’t think that is going to change this year and in fact there are factors that could exacerbate the deficit in 2018.

Vanadium deficits have been precipitated by low prices which have led to mine closures and a lack of new mine development. The low prices were a consequence of cheaper “slag” production in China. A significant portion of vanadium supply comes via a by-product of producing steel (called slag) from some types of iron ore.

As China steel production has boomed, slag production has increased. This resulting supply has pushed expensive mine supply out of the market. As well integrated steel production operations outside of China, which also produce vanadium, have shutdown, like Evraz Highveld in South Africa, which closed in 2015:

The consequence is that inventories have been falling for some time. Recently, this has been exacerbated as long-time stagnant vanadium demand has started to increase.

The traditional usage of vanadium is as an additive to steel that improves its strength. Demand as a steel strengthener has remained fairly flat (though that may change this year as I will discuss). But a new source of demand has emerged – vanadium redox flow batteries.

Vanadium redox flow batteries

I started looking at vanadium back in September when I began looking into ways of playing the electric vehicle (EV) revolution. Vanadium is not directly related to EVs. Vanadium redox flow batteries are not a realistic alternative for vehicles. They are, however, an excellent way to store electrical energy at a large scale. So they are complimentary to the story.

A few months ago I read an excellent book called The Grid. One of its main points is that our grid is about to undergo a massive shift due to renewable generation. But there is a major problem with renewable generation: it is not aligned with consumption patterns. An energy storage solution is necessary.

Because vanadium redox batteries are well-suited for large energy storage applications, they are well suited to helping solve the storage problem.

But vanadium redox flow batteries do use a lot of vanadium. A few numbers will go a long way to illustrating the opportunity:

First consider that the vanadium market is small; its only about 80,000tpy.

From this article, it takes 15 tonnes of vanadium to build 1.6MWh of vanadium redox flow battery capacity. What this is saying is that if these batteries are implemented at scale, they are going to require A LOT of vanadium.

If Vanadium redox flow batteries catch on in scale, demand for vanadium is going to increase substantially.

Other factors weighing on supply and demand

In addition to battery demand, other positive developments are occurring. China is curbing the import of many of the sources of iron ore that produce vanadium as a by-product as part of their efforts to lower pollution. Producing vanadium from slag is dirty, particularly when its from low quality slag. So China is banning the import of such material.

I talked about China’s anti-pollution initiatives in my post about rare earth elements. Much of the same dynamic that I described for neodymium applies to Vanadium. There has been specific actions in the vanadium market that will squeeze supply further, as the Metal Bulletin reported:

a scrap import ban by Chinese authorities at the end of the year will cut approximately 4,500-5,500 tonnes

At the same time, a second move by China will increase demand. As another Metals Bulletin article describes, changes to China’s rebar standards could cause “vanadium consumption to surge 30%”.

My preferred way of playing vanadium is Largo Resources. I also have a smaller position in Prophecy Development Corp. I prefer Largo because they are more liquid and they are currently producing. In fact I believe that Largo is the only public producing vanadium company on the market. They own one of the few primary vanadium mines still producing after the Chinese slag onslaught.

Largo isn’t perfect. They have a habit of issuing shares at a cheap price (like this recent 80c placement back in November). There has been insider selling. They are a single mine operator, so they have the risk of a bad quarter if the mine has a hiccup. And they aren’t particularly cheap based on historic vanadium prices.

Of course the bet here is that history is not a good guide for the future.

I estimate that at current levels Largo is trading at about 7x EBITDA based on the third quarter realized vanadium price of $8.75/lb. As slide 6 of the Prophecy Development Corp presentation I linked to above references, current vanadium prices are $12.80/lb. As is the nature of mining operations, apart from taxes, all price increases in the commodity fall directly to the bottom line. I estimate that Largo trades at a little less than 4x EBITDA at current vanadium prices.

Of course, at some point price increases destroy demand. If this was purely a steel story, like previous prices spikes have been, I would be cautious. But given the emergence of vanadium redox flow batteries and the significant demand they could represent if adopted at even a modest scale, I remain optimistic that prices can hold these levels and maybe even go higher. I don’t think that Largo (and Prophecy) are reflecting this yet.

One wild card is the flow battery. Most people rightly see these as very large units suitable for grid applications such as peak shaving but one or two organisations are thinking the unthinkable about putting them in cars because they are headed for $100 per kWh and size and weight might just fit the bill in due course. Toyota’s advanced research people told us recently that they would not dismiss the possibility.

Clearly there is research going on and so I wouldn’t dismiss it so quickly. The flow batteries charge faster, they have longer lives, so there are reasons that investigations into the limitations will continue. The question was whether the V battery could be used in EVs and I think based on what I have read, at some point that seems possible. I’d like to see a definitive piece on why the flow batteries cannot be advanced to compete with Li-ion at some point? I havent come across that yet.

Fair points and I can’t make a strict case against it.
But I cannot see (also from these articles) how it could possibly work.
I have a physics background and from my understanding, it is difficult to increase the energy density of the system. Because then you get quickly into aggressive materials. Also, if you could increase the energy density of the electrolyte you need to adjust your electrodes. The chemical reaction is basically dependent on the contact surface between electrodes (especially the cathode is limiting) and electrolyte. You can’t just make it faster, as the process is exotherm. You can make it bigger of course, but in contrast to stationary application, in a car you are limited.
And simply “refueling” the electrolyte sounds easier than it is.

Again I would not rule it out, but clearly there is nothing really to suggest why it would be the best solution in cars.
Anyway the case for Vanadium stays, with or without cars.

You are totally right and innovation will continue. I personally love to see such developments.
But how much have they improved the energy density? I didn’t see a concrete number, maybe I missed it.
In this example it comes down to solving more Vanadium. There is a physical limit to that, especially at ambient temperature. Progress, yes. Double and tripple, not so sure.